Investment insights

Whistling a happy tune for investors

May 2018

Fairview Equity Partners

About Fairview

Fairview Equity Partners (Fairview) is an Australian smaller companies equities specialist fund manager based in Melbourne, Australia. It is the investment manager of the Fairview Equity Partners Emerging Companies Fund (Fund) issued by responsible entity, Antares Capital Partners Limited. The Fund aims to provide long-term capital growth and some income by investing primarily in a diverse portfolio of smaller companies listed, or expected to be listed, on the Australian Securities Exchange.

Medical developments

International (MDI) is a Melbourne-based pharmaceutical producer. MDI manufactures Penthrox, a fast-acting pain relief product that, importantly, is not an addictive opioid. The company has sold this to state-based Australian ambulance services for 40 years. Penthrox is best known as ‘the green whistle’ and is seen regularly on the TV show, Bondi Rescue.

Why we invested

Fairview took a position in MDI in September 2015 after the company announced a European licencing deal with the giant privately owned Mundipharma Pty Ltd, a global leader in opioid pain relief. Since that time Penthrox has been approved for use in 10 European countries including the UK and France (as at the 6 March 2018), with another 16 countries imminent. Undoubtedly, bullishness has crept into the stock price as analysts start to forecast significant sales of Penthrox in Europe. However, in the short-term it is tricky to forecast exactly when the initial launch will be and any following sales. So we believe sales in FY18 and FY19 will be lumpy. We prefer to take a long-term view based on the following:

Scourge The opioid-based painkiller abuse epidemic in the USA is escalating rapidly. Unfortunately a great proportion of this is sourced from prescription pain relief drugs that have found their way, through illicit channels, onto the streets. The Economist, in an excellent article in January 2018, suggested that the four-fold increase in total drug overdose deaths in the USA (to a staggering 64,000 people) between 1999 and 2016 was primarily caused by abundant supply.1 These drugs are more readily available than ever.

Possible solution Unlike the readily available opioids, Penthrox’s key differentiator is that it is not addictive; nor does it cause constipation or nausea, and it is much faster in relieving pain than morphine. The US Food and Drug Administration (FDA) has become very interested and a series of meetings were held between MDI and top level FDA executives in 2017. Whilst MDI has clinical data for 235,000 individual patients in 75 clinical trials, we would expect that FDA will demand further trials. This is due to the active ingredient in Penthrox. This ingredient was used as a general anaesthetic in surgical procedures until it was banned by the FDA in the 1970s due to side effects. However, it should be noted that a typical green whistle dose is 90 times lower than the anaesthetic doses 40 years ago.

Market analysis In recent presentations the company has estimated that the potential peak global Penthrox sales for acute trauma pain to be US$2billion. This seems to be the most logical first labelling claim to tick. However further potential indications include:

The medical industry is conservative in changing prescribing habits so we assume a ‘ramped up’ opportunity is at least 5 years away. Conservatively assuming a 20% probability of successful US market entry which the company expects in 2020, we calculate that MDI will trade at a 74% discount to the S&P/ASX Small Industrials Index on that time frame. The company also has a suite of ventilation products as well as novel technology developed in conjunction with the CSIRO that could allow it to manufacture other generic compounds at low cost using a continuous flow process. We currently ascribe little value to these assets, it all depends on Penthrox. However society’s need for this proven product is immense.

While we’re excited about the prospects of MDI, they depend on some key developments, which only time will tell if they play out the way we expect.

1‘America’s opioid epidemic is driven by supply’, The Economist, 29 January 2018.

NCP and ACP are members of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

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